Thread: The hunt for a bargain property

Sounds like fun!:^

1. How to look for a rental property or flippers


Since yesterday, i've looked at more than 100 properties. I went to Multiple Listing Service (MLS) and I also read the newspaper advertising column. I was in luck since Tuesday is the day that real estate advertisementcomes out. I also picked up a couple of local magazines that have real estate advertising.I am pretty well versed with the real estatemarket in my area and I recommend that people who wants to get into real estatedo thisdrill so that they can get a better feel of the market.So far, 3bd 2bt that is around 1100 sf is running about 125-140k in average. This is totally different2-3 years ago when theywere an easy pick for 80-125k. Real estate is definitely going up. I have two properties that I selected and have informedmy real estate agent that I want to see them this Saturday. Here is the breakdown:

1. 3bd 2 bt w/ tenants. Property is located near my other rental properties. Asking price is 128k.

2.4 unit apt with avery big house. 4 unit is divided into 2 = 2 bd 1 bt and 2 = 1 bd 1bt. Place is R2 located in a half acre lot. Place is central andit is within my neighborhood.Asking price is 369k.

Next, i'll be doing the paper analysis to see which one will give me a better return.

I can't wait. Thanks for doing this step by step, it should really help!

I've added two more properties to look at this weekend.

3. $127,500 4bd/3ba 1,357 sf 600sqm, w/huge extension at rear, carport, MOTIVATED SELLER (my favorite friend). place is about 30-45 minutes south from where I live. Most of my properties are north of my place so this is going another direction and could be an inconvenient to pick up rent... I'm lazy...

4. $125k 3bd/1.5ba fully fenced, ceramic tiles, indoor laundry, carport and split a/c. This is about 10 minutes from the rest of my other properties.

My rule of thumb, research 100 properties, pick 10 properties,make an offer on 5, buy 1.Never ever pay the asking price except for extraordinary circumstances like you are in Hawaii and you know that thereis an aircraft carrier thatis about to be assigned there (this is a fact and is currently happening in Hawaii).

I currently have 30k in the bank.This is the left over proceeds from me selling my 4plex that I got for 170k in July and sold it for 250k onOct.I am also in the process of refinancing my 8 unit apt which was bought for 240k in March 2003.Current balance is 198k. I'm looking to refinance for 280k. After everythingsettles, I shouldpocket 65k for that transaction.I also have 50k equity line of credit for the 8 unit apt.This gives me30k + 65k+ 50K = 145k readily available cash to purchase a property.

This power will allow me to buy the property in cash and should give me negotiating leverage with the seller. However,another rule of thumb is that the less money coming from your pocket the higher the return and lower the risk.You can rest assure that I will only use all my cash if I could get a better deal from the dealer. However, as soon as the property is under my name, I will immediately go to the bank and refinance so that I can get my money back. Here is an example, Lets say the sellerwants 125k but there are something wrong with the house such as renovation which would cost about 5k. I'd offer105k-110k, i'd pay all cashwe'd close in1 week. If the property appraised for135k (my real estate agentused to be an appraiser and he always tell me if the property could be appraised higher than the selling price) and the title is mine free and clear, the bankcan lend me 80% of the appraised value which should come out to 108K.If I paid 110k and got back 108k by refinancing, I just lower down my risksince now my cash on cash investment on the property is only 2k.

On top of my head, 108k with 7.5% interest w/30yearsshould give me a mortgage of $600 property tax and insurance should be another$150 for a total of $750. I know that I can rent a 3bd/2 bt for$1100.This would give me $350 positive cash flow per month and$4200per year.Sincemy investment went down to $2k, my cash on cash return on my investment is 210%.This means that I will get all my money backfor the first year(plus more) and every year after thatare all profits.

I hope that you can all seewhat I am talking. I'm open to discuss this for anyone who might have any questions concerning to this post.... Sorry, very lengthy...

I have a question. You know about my rental property as we have talked about it before. It is a trailer on an acre. I bought it and paid for it in five years why I lived there. Now it is a rental. Can I still depreciate it now that it is an investment? Is so at what rate? I thought from my accounting classes many years ago it was a 10 year depreciation, but I cannot seem to get the calculation you used on the example spreadsheet you provided.

Shaggy wrote:

I have a question. You know about my rental property as we have talked about it before. It is a trailer on an acre. I bought it and paid for it in five years why I lived there. Now it is a rental. Can I still depreciate it now that it is an investment? Is so at what rate? I thought from my accounting classes many years ago it was a 10 year depreciation, but I cannot seem to get the calculation you used on the example spreadsheet you provided.

Hmmm... The rules don't changed just because you paid off the property and made thema rental. Something about depreciation, it is constant. This means that if you use 40 years as your depreciation factor when you first bought it, it should still be the same one youshould use while you are having it rented.However, please don't think that you can start all over again since the property is now a rental property. So your depreciation factor should beCost of purchase divided 40 years.Totalfor each year is your depreciation factor.

Please note that my expertiseare buildings, houses, and apartments. I am not very familiarwithtrailers (Our typhoons will toss them in the air in a heartbeat). 40 years is a safe depreciation factor for it covers pretty much all of them. However, it might not be conducive for you especially if you are trying to depreciate your property faster. In some of them you can use 27 years as depreciating factor.:^

OK but I have never depreciated it any because for the first five years I lived in it so I could not take a depreciation on it. So I would have to take the purchase price / by say 30 years and then apply that amount for the next 25 years since I was not entitled to the first five. Sound right?

Shaggy wrote:

OK but I have never depreciated it any because for the first five years I lived in it so I could not take a depreciation on it. So I would have to take the purchase price / by say 30 years and then apply that amount for the next 25 years since I was not entitled to the first five. Sound right?

You are entitled on the first five. Depreciation is not just for rentals. It is also for homeowners...:^

As of Saturday, 8 Oct 05, I visited all properties that I picked. I was going to do the paper cost analysis but decided to wait until after I saw the properties. Out of the 4 properties I looked at, I've decided thatonly onefits my investment rules; #1. (3bd 2 bt w/ tenants. Property is located near my other rental properties. Asking price is 128k).

#2 was eliminated because although it is a good investment, the I would have had to put 30% down payment. Askign price is 369K. Even if I am successful in bringing it down to 300k, I still have to come up with 90k for downpayment + closing fee and appraisal of about 20K. Loan will have to go to commercial because all banks here consider anything above 4 units to be in commercial loans. There is also an issue whether there is a setback problem due to close proximity of the 4 plex and the big house upfront.

#3 was eliminated because I learned that although the owner is a motivated seller and she is currently off island, she is not hurting financially. Place will also be harder to rent since it is farther away from the city. There is also an estimate of 10-15k of repair that must be done.

#4 was eliminated because I learned that the owner bought the property for 115k a year ago. He went ahead and put a fence around the properties because of his dogs. I feel that the owner will not have any room to negotiate since he is still maxed out with his loan + fencing costs. Place is also located in a ghetto like area so appreciation is unlikely. I like buying a property in a steal with equities imbedded into it.

What is a setback? Setback is the boundary betweent the building and the property point. Here A house must have boundary points of 10 feet in the back, 8 feet on the side, and 15 feet in front. If the house is non conforming, it gets harder to get a financing from the bank. Now it is not impossible to get financing somewhere else but you will have to sacrifice loan term such as ARM instead of fixed, prepayment penalties vs. no prepayment penalties, etc. etc...

I will be going back toproperty #1 this afternoon to relook at the inside of the house. If I like what I see, I will then do a paper analysis for my cash on cash return on investment. If I don't like what I see, I am back to square one and must resume looking for another 100 properties. Happy rental house hunting...

I currently have 30k in the bank.This is the left over proceeds from me selling my 4plex that I got for 170k in July and sold it for 250k onOct.I am also in the process of refinancing my 8 unit apt which was bought for 240k in March 2003.Current balance is 198k. I'm looking to refinance for 280k. After everythingsettles, I shouldpocket 65k for that transaction.I also have 50k equity line of credit for the 8 unit apt.This gives me30k + 65k+ 50K = 145k readily available cash to purchase a property.



Okay, I hear you. Like many people with much experience in a particular field, they tend to take much of their knowledge for granted especially as it concerns how other(s) would understand what they are saying.

The first two sentences tell me that80K was madein three months, over 50 % or 200% return in one year. Nice return: Question: howdid that happen? How does one get such a huge return in so little time?

Anyhow, there was 30K left over from that transaction.Now the next two sentences; an 8 unit apt was bought in Mar. 2003 for 240K, and currently 198K is on the mortgage. I suppose the rental income is being used to pay the mortgage there. By refinancing for 280k, does that mean the property has appreciated 40K over that timeframe? The 50K equity line probably includes the rental income and how that was used to secure equitysince March 2003.

After everything settles, I should pocket 65K for that transaction. It is plain where the first 30K came from, it is not so obvious where the 50k came from, but I gather it came from the rental income.

By refinancing at 280k, the price appreciated after 2.5 years; okay, are you saying then that 40k difference is being counted as increased equity on your property so where does the other 25K come from to make 65K?

Sounds complex.

Quips wrote:

The first two sentences tell me that80K was madein three months, over 50 % or 200% return in one year. Nice return: Question: howdid that happen? How does one get such a huge return in so little time? Actually, the return is much higher than 200%. I used my VA loan to acquire the 4plex (so no money down) for 160k. I included some of the closing cost and VA also let me borrow 6k more to install energy efficient appliances. So my mortgage went up to 170k. The place needed some renovation so I went to another bank and borrowed 25k to pay for some closing and renovation. As you can see, no money has left my pocket yet. Iclosed on the property on7 Jul 05. I thensold it for 250k. So lets do the math. 250k (selling price) - 170k (loan amount)= 80k - 25k (personal loan from another bank) = 55k - 13k (truck loan from the corporation) = 42k - 12k (I decided to renovate some part of my house = 30k. However, the real profit is 55k or 55,000% within 3 months and not the 200% that you mentioned earlier. Why is it 55,000% and not 200%? This is because I have zero money that came out of my own pocket. All investment within this deal came from OPM. So for zero money investment, I received 55k in return.

Anyhow, there was 30K left over from that transaction.Now the next two sentences; an 8 unit apt was bought in Mar. 2003 for 240K, and currently 198K is on the mortgage. I suppose the rental income is being used to pay the mortgage there. By refinancing for 280k, does that mean the property has appreciated 40K over that timeframe? The 50K equity line probably includes the rental income and how that was used to secure equitysince March 2003. 8 plex was bought for 240k. I put a 10% down and the bank financed 216k. Tenants have been paying for 2 years now and my balance is 198k. So my cash investment that came out of my pocket is 24k + 8 k closing cost = 32k. Property was bought in dilapitated state (this is what I like buying run down places). The property, we believe, is now worth over 400k with no less than 350k. So worst case scenario, the property appreciated 110k within 2 years or best case of 160k (or more?). (I'll talk about how appraisersdo their figures toward the end). As for the 50k equity line of credit that I have with the property, I pay $300 to keep that. They give me checks that I can tap into whenever I feel like doing so. Right now it is just sitting there just in case there is a really good deal that pops out. The $300 yearly fee is tax deductible.

After everything settles, I should pocket 65K for that transaction. It is plain where the first 30K came from, it is not so obvious where the 50k came from, but I gather it came from the rental income. 50k is an equity line of credit usable anytime I feel like it. here is the breakdown for refinancing the 8 plex. Refinanced for 280k - 198k (loan amount) = 82k - 8k (prepayment penalty) = 74k - 9k (closing cost and appraisal fee) = 65k. There is your 65k.Now people always tell me that real estate is risky. But lets look at this particular scenario. I put down 24k + 8k for closing for a total of 32k. This is my cash investemnt for this property. After doing my refinance, I will get an excess of 65k. This means that I will get all my money back within 2.5 years. That is a return on my cash on cash investment of over 200% return. You see? Not only that I got my cash investment back, Iactually doubled them and the money is here right now, ready to be used. Unlike our TSP, IRA, 401k, you have to wait until you retire totouch them. I also was able to utilize the phantom incometo bring down my personal income tremendously. The best part of all of this is thatallpassive income coming from the rental now are all profits or return on investment. My original investment is back in my pocket. Now, i'd like anyone to tell mewhich one is more risky, our TSP, IRA, 401K or real estate investment.

By refinancing at 280k, the price appreciated after 2.5 years; okay, are you saying then that 40k difference is being counted as increased equity on your property so where does the other 25K come from to make 65K?Please read above. I showed you where the 65k came from, where the 30k came from (it is actually 55k but I used some of the money which left me with only 30k), and where the 50k came from (equity line of credit).

Sounds complex. It is not that complex.